Trading on a margined basis in
forex trading is not a complicated concept as some may make
it out to be. The easiest way to view margin trading is like this:
Essentially when a trader trades on margin he is using a free
short-term credit allowance from the institution that is offering
the margin. This short-term credit allowance is used to purchase
an amount of currency that greatly exceeds the account value
of the trader. Let's take the following example:
Example: Trader x has an account with EUR 50'000 with ACM. He
trades ticket sizes of 1'000'000 EUR/USD. This equates to a margin
ratio of 5% (50'000 is 5% of 1'000'000). How can trader x trade
20 times the amount of money he has at his disposal? The answer
is that ACM temporarily gives him the necessary credit to make
the transaction he is interested in making. Without margin, trader
x would only be able to buy or sell tickets of 50'000 at a time.
On standard accounts ACM applies a minimum 1% margin. By trading
with ACM, trader x has the capacity to make transactions up to
5'000'000 EUR at a time.
Margin serves as collateral to cover any losses that you might
incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose
for having funds in your account, is for sufficient margin.
The margin capacity ACM offers reflects our willingness to provide
the trader with the level of risk he wishes to adopt, we do not
however recommend trading with full 1% margin capacity as this
engages a large amount of risk. Ultimately the choice is left
to the trader to make transactions that meet his appetite for
risk.
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